World View & Market Commentary. Forest first; Trees second. Focused on Real & Knowable facts that filter through the "experts" fluff and media hyperbole. Where we've been, what the future may hold and developing a better way forward.

Monday, March 16, 2009

Was it Warren Buffett who said that they don’t ring a bell at the top? At the risk of being a little premature, let’s have some fun with some heavy metal bells…

Metallica – For Whom the Bell Tolls:

And right after the stock market bell, the bell tolled for Alcoa (AA) who slashed their dividends and announce future share dilution causing the stock to fall nearly 20% from today’s high.

For the day, the DOW lost 7 points after being up 160 points early in the day, the S&P reversed to close down .4%, the NDX started down and kept on going, losing 2%, while the RUT bearishly engulfed Friday’s candle and finished down 1.7%. The Transports were strong initially but gave back quite a bit still finishing up 3.7%. The XLF lost 2%.

Internally it was a bullish day which is where prices spent most of the time today. Advancing shares were ahead of decliners 17 to 13, while 57% of the volume was positive. New lows remained low, of course. The Put/Call advanced to a still low .80, while the VIX gained a little but is trapped between the 200dma below and the 50dma above.

So much enthusiasm for surely we have been saved! Why Ben Bernanke even got on 60 minutes and showed us the INSIDE of the “Fed” building! And not only that, we got to the see the town of 6,000 people where he grew up! And to top it all off, Citi Bank rose 30% today! In just one day! Here’s a one year chart, don’t strain too hard to see this amazing and spectacular rally:

Don’t worry, Bernanke said he won’t let the big banks go under and the recession is almost over. Of course you need only look at the track record of his calls over the past two years to see exactly what the odds are of these latest ones coming true.

Let’s look at a 10 day, 10 minute chart of the SPX. It’s busy, I know… let’s start by looking at the green uptrend channel. Clearly it was broken by the end of day selling. Also note the red ending diagonal pattern that I pointed to in the daily market thread. That line breaking was your clue that this wave up had finished. Looks like a nice 5 wave pattern and I note that it was impulsive, and that wave 5 was within 1 point of being equal length with wave 3. Let’s call that wave A… now we’ll likely get some type of wave B. It could easily retrace 50% or more of wave A, and could turn into a triangle or other complex pattern as wave two looked like a simple ABC (this should be wave 4). Note that the stochastic is oversold on this timeframe already – the fast is also oversold on the 30 min stochastic, but the slow is just coming out of overbought. This is where my settings work well, as you could have some retrace tomorrow upwards, but it will likely lose out to the longer term pressure of the slow and the 60 minute stochastic which has really just begun down. (If you look on a 30 minute chart note that the last 3 RSI peaks are progressively lower while prices were progressively higher. That’s a bearish divergence in the short term which cannot be ignored as RSI divergences always correct and usually pretty rapidly):

Next is a 10 minute chart of the DOW. Same deal with the ending diagonal which broke (red) and was immediately followed by a broken up channel:

Moving on to the daily charts, here’s the SPX, one month. Note that the top was abeam the prior peaks just below the 780 area. The fast stochastic is already way overbought and it was above 94 earlier in the day. That candlestick is a red inverted hammer that is shadowing Friday’s upright hammer. This is a pattern that usually favors the second hammer and the break from it can be quit exciting. It sure looks like a top, but we must see it confirmed by tomorrow’s action:

Here’s the DOW daily. That’s a gravestone doji, whose place on top of the run higher certainly places it in the top formation category, but although I’m ringing bells, it does need to be confirmed by tomorrow’s action. Volume was higher today on the DOW and on most of the other indices as well. Again note the overbought daily stochastic, but the slow is just coming up which is typical for a wave A. Wave B should bring the fast back down and then on wave C up, both the fast and slow will likely be overbought:

Look at the NDX daily. Here that outside hammer on Friday was bearishly engulfed. Bearish formation for sure, especially with the stochastic overbought and the turn down from the 50dma. Again, though, would like to see confirmation with the action tomorrow:

Next up is a 3 month view of the XLF. It managed to run higher over that black hammer, but the hammer was prophetic and wound up with lower prices today after touching the upper Bollinger band and mostly filling that gap up in the shaded oval. I would say the same thing here, that it looks possibly like wave A of an ABC. Remember that the financials have been beaten up very well so obviously beating it down further will be difficult. Perhaps we enter more of a sideways type of pattern overall in the financials while other less beat down segments catch up?

CRE (IYR and other REITS) are one of the segments that still have some meat on the bone. They are pretty well beaten down and heavily shorted, that’s why they rallied so hard over the past week. That got overdone, and today they went down hard with IYR losing 7.4% today and looking quite bearish in the short term:

Lastly, let’s look at TLT following this morning’s TIC data. That was a big move down that pushed it below support and into the gap that is annotated by the red lines. See how the Bollinger bands necked down? Breaks out of a formation like that can be violent. If you are a bond investor, I suggest you pay attention to that formation and to the TIC data as well. It’s telling you that bond investors are leaving. Just look at the trend here since the beginning of the year. Bonds down, stocks down. Look at the green 50dma and how it has peaked and is now pointing down. I still contend that there’s not enough cash to make them both go up at once or to have bonds maintain record low rates while stocks rise:

So, overall I think today looked very much like a top. It’s not unusual to retrace higher in an attempt to fool the bears, so watch for a possible channel retest in the morning. It’s possible that wave B is a simple 3 wave move itself, so if you see a wave up and another wave down tomorrow, you may want to get a little protective. And of course we could just slide further down before any retrace comes. The pivot points likely for a turn are at 734 (38.2%), or 720ish (50%). If we get much beneath there, then the 61.8 at 707 or the 696 pivot are in play prior to a retest of the prior 666 low – HELL’S BELLS!